Hurdles of 2009

Bankruptcies, lawsuits, club closings and the LA Fitness shootings dominated headlines this year.

From falling stock prices at public club companies to bankruptcy filings to club closings, 2009 was a difficult year for many in the fitness industry. Add those issues to the many other hurdles that club operators and manufacturers had to overcome, including lawsuits, a federal investigation, labor inquiries and proposed bills on licensing personal trainers and yoga instructors. If anything, this year will be remembered more for issues that happened outside clubs than inside clubs.

Despite this tragedy and the economy, some news was positive. A few companies enjoyed growth, including low-priced Planet Fitness, key-card companies Anytime Fitness and Snap Fitness, plus companies such as Washington, DC's Sport & Health and Mark Mastrov's New Evolution Fitness Co. (NEFC). Those companies took advantage of growth opportunities that others could not.

One can only hope that better days are ahead for all fitness companies. For now, here's a look at some of the biggest stories in 2009.

IN THE PUBLIC EYE

Because they are public companies, Life Time Fitness, Chanhassen, MN, and Town Sports International (TSI), New York, are two of the most scrutinized companies in the club industry. Their successes or failures in relation to their publicly traded stocks are fair game for Wall Street analysts.

What analysts saw early this year — as they saw with most public companies — was a dramatic drop in prices for Life Time and TSI stock. Life Time's stock price, which hovered around $50 per share in January 2008, fell to as low as $7.07 in early 2009. TSI's stock, which was just under $10 at the beginning of 2008, fell to as low as $1.40 in early 2009.

Life Time revenues grew in each of the first three quarters this year, but the company also reported decreases in net income throughout the year. CEO Bahram Akradi has been disappointed in the company's attrition rate, which has been in the low 40s. The company also slowed its growth rate, opening only three clubs this year compared to 11 in 2008.

TSI reported decreases in both revenue and membership throughout the year. In January, the company completed a round of layoffs, which eliminated 47 non-club positions, or 11 percent of TSI's non-club workforce. TSI also froze non-club salaries, including executive salaries, at 2008 levels. Like Life Time, TSI slowed its growth, opening four new clubs while closing nine this year.

TSI became the subject of a formal investigation by the U.S. Securities and Exchange Commission (SEC) in which the SEC is examining TSI's reporting of expenses and revenues as they relate to the average length of club memberships. TSI also paid fines totaling $40,000 in Massachusetts for violating that state's child labor laws. TSI was cited for more than 1,600 violations in 23 Boston Sports Clubs that it operates in the state.

The economy hit manufacturers equally as hard this year. Two public manufacturing companies, Nautilus Inc., Vancouver, WA, and Life Fitness, Schiller Park, IL, reported falling sales throughout the year.

Nautilus stunned the industry by announcing it was discontinuing its commercial business this year. The company halted orders for commercial equipment in October. One result is a likely closure of Nautilus' plant in Independence, VA.

Brunswick Corp., which runs the Life Fitness Division of the company that manufactures and sells Life Fitness and Hammer Strength equipment, said its sales have declined because club operators remain cautious about ordering new equipment.

BANKRUPTCY FILINGS

Three club companies — Chicago-based Bally Total Fitness, New York-based Crunch and Charlotte, NC-based Peak Fitness — all dealt with bankruptcy issues in 2009, and two of the companies emerged with new owners.

Bally re-emerged from its second bankruptcy in two years, but it came at a price. The company closed about 50 clubs since filing for bankruptcy in December 2008. Those closings dropped Bally's club numbers to less than 300.

JP Morgan Chase Bank and Anchorage Advisors LLC own a majority interest in the reorganized Bally. JP Morgan received 50.5 percent of Bally's equity, and Anchorage received 33.7 percent. Bally was able to reduce its debt by approximately $700 million to less than $100 million.

Crunch filed for bankruptcy in May with the intent that it would emerge with new ownership, spearheaded by NEFC, which is run not only by 24 Hour Fitness founder Mastrov but also by former 24 Hour executive Jim Rowley. NEFC and private equity firm Angelo, Gordon & Co., which had bought Crunch from Bally in 2005, bought Crunch's debt from Goldman Sachs Credit Partners last December.

The Crunch sale was completed in August when it emerged from bankruptcy. Mastrov became the chairman, and Rowley replaced Tim Miller as CEO. Crunch, which had 28 clubs before filing for bankruptcy, pared its company down to 18 clubs and exited the Chicago and Atlanta markets, focusing on its four core markets: New York, Los Angeles, San Francisco and Miami.

Fitness Management Group, owner of Peak Fitness, which has been the subject of several member complaints that resulted in investigations by the North Carolina Attorney General's office, filed for bankruptcy in July. That came on the heels of the April bankruptcy filing by Peak Capital Holdings LLC, which operated Peak Fitness clubs in the Raleigh, NC, area.

Next Page: Private Club Spotlight

Peak Fitness, which settled lawsuits with the state Attorney General's office involving Peak's customer service, contracts, billing practices, prepaid memberships and bonds, closed several clubs this year as part of the reorganization. The number of Peak Fitness clubs was cut in half from more than 30 to around 15 in North Carolina and South Carolina. Pending a bankruptcy court's approval, Peak Fitness will be sold to Nevada-based Fuzion Investment Capital LLC.

Manufacturers were not immune to bankruptcies. Strive, an equipment manufacturer in McMurray, PA, continues to operate through its bankruptcy reorganization process, which began in October. Another manufacturer, Body Masters, Rayne, LA, did not file for bankruptcy but was foreclosed upon earlier this year by Knight Companies, an oil field rental company. Body Masters was in business for 30 years.

PRIVATE CLUB SPOTLIGHT

Of all the private companies in the industry, LA Fitness, Irvine, CA, may be the most private. The company has never disclosed much information, despite its growth as one of the biggest players in the industry.

Imagine the shock LA Fitness executives — and the rest of the industry — had the night of Aug. 4, when a gunman went on a shooting spree at an LA Fitness in the Pittsburgh suburb of Collier Township, PA, killing three people and wounding nine before turning a gun on himself. The club was closed for nearly three weeks before reopening.

Several of the victims, including the pregnant Latin impact dance instructor who was shot but survived, have since filed suit against the gunman's estate. As of press time, LA Fitness has not been the subject of any reported lawsuits. LA Fitness officials declined to speak publicly about the incident, aside from statements of condolence on its Web site.

24 Hour Fitness, San Ramon, CA, had its own violent shooting death to handle. A woman who had been a group exercise instructor in several Oregon clubs was allegedly shot to death at her day job in a drug-testing clinic by her estranged husband in an apparent murder-suicide.

Several lawsuits against 24 Hour, which celebrated club openings from Maryland to Hawaii this year, have also caused concerns for the company. In one of the lawsuits, two former district managers say they were forced out of their jobs at 24 Hour for complaining about discrimination in the workplace.

In a class-action lawsuit, members are questioning 24 Hour's method of re-branding its clubs, claiming they were sold all-club memberships but are not allowed into all types of 24 Hour clubs, which include Sport clubs, Super Sport clubs and Ultra Sport clubs.

Two more class-action cases against 24 Hour are a continuation of lawsuits that originated in 2006. One suit accuses 24 Hour of taking monthly payments out of members' accounts after they have cancelled their memberships. Another suit claims 24 Hour does not pay group exercise instructors for time spent before and after class or for attending training and certification courses. 24 Hour denies claims in all of those cases.

Bally, in addition to its bankruptcy filing, dealt with a separate legal matter. In February, Great American Insurance Co. sued Bally for $10 million, aiming to recoup the money advanced to Bally for directors and officers coverage. A court ruled in June that Bally could keep the $10 million.

Planet Fitness, Dover, NH, which completed its sale of World Gym to the Joyce J. Cammilleri family in late December 2008, offered $10-per-month memberships during the difficult economic climate this year. Yet like other companies, Planet Fitness endured some legal issues.

A Planet Fitness franchisee in Maryland, Diana Dutt, filed suit against the company and Brick Bodies, Cockeysville, MD, claiming both companies violated Maryland franchise registration and disclosure law as well as the state's antitrust act. Dutt said she and her husband had an exclusive area development agreement in place with Planet Fitness. She also said she and her husband later learned that Planet Fitness struck an area development deal with Brick Bodies that left her out.

Both Planet Fitness and Brick Bodies denied the claims in the suit. Last month, the Dutts and Planet Fitness reached a settlement that releases the Dutts from their franchise agreements and allows them to de-brand their clubs by no later than the end of next February. As of press time, the Dutts had not reached a settlement with Brick Bodies.

For Gold's Gym International (GGI), Irving, TX, it was another year, another new CEO. Despite the goodwill developed between the corporate office and Gold's franchisees, GGI announced the resignation of CEO James Weaver in October. Weaver was replaced by Jim Snow, who was an executive with Omni Hotels, owned by Gold's parent company, TRT Holdings. Snow became the third GGI leader in 12 months.

In addition to the progress made with franchisees this year, which included a task force formed by GGI and the Gold's Gym Franchisee Association to create a group purchasing program, Gold's rolled out a smaller box club model and announced a new international vendor program.

In November, Gold's announced the departure of Kirk and John Galiani, who became Gold's franchisees in 1990 and were part-owners of GGI from 1999 to 2004. The Galianis announced the creation of their own brand, Onelife Fitness, for their clubs in Virginia. (See page 8.)

Earlier in the year, Gold's mourned the death of franchisee Eddie Dail, who was honored this year with two awards at the annual Gold's convention in Las Vegas. Dail died of a heart attack at the age of 44.

Next Page: Legislative Agendas

LEGISLATIVE AGENDAS

Proposed bills in states across the country had the industry buzzing in 2009.

Personal trainers in Massachusetts appeared at a hearing in July that included representatives from TSI, Millennium Partners Sports Club Management and the International Health, Racquet and Sportsclub Association (IHRSA). Each representative testified against a proposed bill that would license personal trainers in that state.

The bill would require license applicants in Massachusetts to: 1) be graduates of an accredited educational program leading to professional qualifications in personal training; 2) hold a certification accredited by the National Commission for Certifying Agencies; and 3) pass an exam with oral and practical demonstrations of skill. Last month, IHRSA predicted that the bill will not move forward in next year's regular session.

Similar bills have been proposed in other states. Last month, IHRSA announced its opposition to a New Jersey bill that requires certification of personal trainers and group exercise instructors and charges the state's Board of Medical Examiners with oversight of the bill's certification requirements. (The original bill called for licensure of trainers and instructors.) Health clubs also must be registered in New Jersey and renew every two years, according to the bill.

The state of New York has been the hotbed of two pressing issues: yogalicensing and taxes on memberships. In the spring, the New York State Education Department threatened to suspend yoga teacher training programs and fine them if they did not adhere to state regulations that oversee vocational training.

Two bills were introduced this summer exempting yoga instructors from licensing requirements, which the department eventually withdrew. Several other states, including Louisiana, Michigan, Oklahoma, Texas and Virginia, are considering legislation to license yoga instructors.

Also in New York, Gov. David Paterson dropped plans to add sales taxes to health club dues and services. Health clubs would have been included in a plan to extend the state's personal and credit services sales tax, which also would have included beauty shops, barbers, nail salons and massage therapy. The governor's office estimated that the tax would have brought in$78 million for the 2009-2010 budget and $104 million for the 2010-2011 budget. IHRSA lobbied against the proposed sales tax.

However, in Missouri, yoga and Pilates studios have been ordered by the state's department of revenue to collect sales tax on the fees for their classes and services. Sales taxes also are collected in West Virginia but not in Ohio, where that state taxes gym, recreation and sports club memberships, not the classes offered.

In addition to a personal trainer licensing bill, the Massachusetts legislature introduced a bill nicknamed “the bathroom bill,” which supports transgender anti-discrimination rights. IHRSA and other organizations testified against the bill this summer. About 13 states, including Maine, Rhode Island and Vermont, have passed similar anti-discrimination laws.

Many of the hurdles that the industry faced in 2009, particularly the economy and legislative efforts to license and tax, will likely remain as issues again in 2010.

Military Stresses Mental and Physical Fitness

By Stephanie Bloyd Even before an Army psychiatrist allegedly shot and killed 13 people at Fort Hood, TX, in November, concerns were raised about the mental stress that America's armed services personnel have been under.

Earlier this year, the Army announced plans to address the issue. In August, Army Chief of Staff Gen. George Casey said that the Army's Comprehensive Soldier Fitness Program, designed to help troops fight the mental stress associated with combat, would be added to basic training programs. The program will be covered in the first week of basic training and be continued throughout all levels of training for officers and enlisted personnel.

To better assess post-deployment health among sailors in the Navy, commands can now access their deployment health assessments online, according to an early 2009 Navy announcement. If sailors complete their post-deployment health assessment several months after returning home, the view of their overall health may have changed, sometimes for the worse. The post-deployment health assessment should identify stress injuries and other health concerns that require further attention or treatment.

University Rec Centers Focus on Green Efforts in 2009

By Stephanie Bloyd Exercise equipment retrofitted to create energy is making waves in the world of university fitness. Although the amount of energy generated probably isn't enough to cover a rec center's total power needs, it can reduce utility bills, depending on local utility codes. Several schools installed retrofitted ellipticals this year, including the University of Oregon, Eugene, OR, the University of Kansas, Lawrence, KS, and Texas State University, San Marcos, TX.

Universities are at the forefront of going green in other areas, too. In May, the University of Arizona, Tucson, AZ, began adding solar photovoltaic panels and solar water heaters to rooftops of its student rec center, aquatics center, parking garage and two other university buildings. The school worked in conjunction with an energy services provider to rent the solar equipment and minimize the cost of its initial investment to purchase and install the arrays. The University of Oregon also installed solar photovoltaic panels on its rec center roof.

The campus recreation center at the University of Colorado, Colorado Springs, received Leadership in Energy Efficiency and Design gold certification status from the U.S. Green Building Council. The center features rooftop solar panels to heat the swimming pool, insulated concrete form walls, built-in recycling stations and native landscaping.

Notable Comings and Goings in 2009

DEPARTURE: Michael Gerend, COO, Life Time Fitness

ARRIVAL: Bud Rockhill, CEO, Spectrum Athletic Clubs

DEPARTURE: Timothy Joyce, general manager, Nautilus

ARRIVAL: Russ Findlay, vice president of sales, Town Sports International